Economic and Public Interest Requirements for
Contract Market Designation

AGENCY: Commodity Futures Trading
Commission.

ACTION: Proposed Rulemaking.

_____________________________________________________________

SUMMARY: The Commodity Futures Trading
Commission ("Commission") is proposing revisions to its
Guideline on Economic and Public Interest Requirements for Contract
Market Designation, 17 CFR Part 5, Appendix A ("Guideline No.
1"). Guideline No. 1 details the information that an application
for contract market designation should include in order to demonstrate
that the contract market meets the economic requirements for
designation. The Commission recently promulgated fast-track review
procedures to reduce the time for Commission review of such
applications. In furtherance of these streamlining efforts, the
Commission is proposing that Guideline No. 1 itself be revised to
reduce any unnecessary burdens associated with the designation
application.

Specifically, the Commission is proposing to
reorganize Guideline No. 1 into several specific application forms,
making use to the extent possible of a checklist or chart format.
Moreover, the Commission is clarifying that a portion of the
application may make use of third-party generated materials. In
addition, the Commission is clarifying the review standards for
several of the designation requirements. The Commission is also
proposing that a new appendix be added to Part 5 that would specify
the information that should be included by a foreign board of trade
seeking no-action relief to offer and to sell in the United States a
futures contract on a securities index traded on that exchange.

DATE: Comments must be received by [insert
date 60 days after publication in the Federal
Register].

ADDRESS: Comments should be sent to the
Commodity Futures Trading Commission, Three Lafayette Centre, 1155
21st Street, N.W., Washington, D.C. 20581, attention: Office of the
Secretariat. Comments may be sent by facsimile transmission to (202)
418-5521 or, by e-mail to secretary@cftc.gov. Reference should be made
to "Revisions to Guideline No. 1."

The requirement that boards of trade demonstrate
that they meet specified conditions in order to be designated as a
contract market has been a fundamental tool of federal regulation of
commodity futures exchanges since the Futures Trading Act of 1921,
Pub. L. No. 67-66, 42 Stat. 187 (1921).1/ Currently, the statutory
requirements for designation are found in Sections 5 and 5a of the
Commodity Exchange Act (Act) and, additionally, for indexes of
securities, in Section 2(a)(1)(B) of the Act. Designated contract
markets must provide for the prevention of dissemination of false
information (Section 5(3) of the Act); must provide for the prevention
of price manipulation (Section 5(4) of the Act); must provide for
delivery periods which will prevent market congestion (Section
5a(a)(4) of the Act); and must permit delivery on the contract of such
grades, at such points and at such quality and locational
differentials as will tend to prevent or to diminish market
manipulation (Section 5a(a)(10) of the Act).2/ Included among these provisions is
the general requirement of Section 5(7) of the Act that trading in a
proposed contract not be contrary to the public interest. The contract
market must meet these requirements both initially and on a continuing
basis.3/

The Commission, as an aid to the exchanges, has
provided guidance in meeting these statutory requirements. In 1975 the
newly formed Commission, in one of its earliest actions, issued its
Guideline on Economic and Public Interest Requirements for Contract
Market Designation, 40 FR 25849 (1975) ("Guideline No.
1").

Subsequently, the Commission revised this
guideline, publishing it as Appendix A to Part 5 of the CodeofFederalRegulations. 47 FR 49832 (November 3,
1982). As revised in 1982, Guideline No. 1 was updated to address
proposed innovations in the trading of futures contracts, including in
particular, futures contracts on financial instruments and on various
indexes and cash-settled futures contracts. Experience has
demonstrated that the guideline has been adaptable and flexible,
facilitating the designation of a wide range of innovative
products.

Guideline No. 1 was again revised in 1992. 57 FR
3518 (January 30, 1992). The 1992 revisions streamlined the
designation application for both futures and option contract markets.
Under the 1992 revisions, the standard of review for specified terms
and conditions of proposed contract market designations under Sections
5 and 5a of the Act was clarified. Moreover, the 1992 revisions
eliminated unnecessary and redundant materials by requiring that an
application for designation of a futures contract include a
cash-market description only when the proposed contract differs from a
currently designated contract and that it need justify only individual
contract terms that are different from terms which previously have
been approved by the Commission. 57 FR 3521.4/

In addition, the 1992 revisions introduced the
use of a new checklist-style format for applications for designation
of option contracts. The checklist application for option contracts
has reduced the required filing of redundant or otherwise unnecessary
information, resulting in designation applications which are clearer
and more concise. Presumably, the exchanges have thereby realized
savings in both the time and costs associated with filing an
application. Moreover, the uniform format has enabled the Commission
to review such checklist applications in a more timely and efficient
manner. Applications for designation of options on futures contracts,
however, are uniquely amenable to such a checklist format because
option contract terms tend to be highly uniform and the majority of
issues arise in connection with the designation of the underlying
futures contract.

In April 1997, new Commission Rule 5.1
establishing fast-track procedures for Commission review and approval
of applications for contract market designation became effective. 62
FR 10434 (March 7, 1997). That rule creates a streamlined and speedy
alternative review process for Commission consideration of designation
applications, reducing unnecessary regulatory burdens on exchanges
while also preserving the opportunity for public participation where
needed and fulfillment of the Commission's oversight
responsibilities. Under the fast-track review procedures, applications
for designation of certain cash-settled futures and option contracts
are deemed to be approved ten days after receipt, unless the exchange
is notified otherwise. Certain other applications are deemed approved
45 days after receipt absent contrary notification. Since implementing
fast-track review procedures in April 1997, 45 contracts have been
approved by the Commission under this rule, 18 under the 10-day
procedure and 27 under the 45-day procedure.5/

The Commission, in promulgating the fast-track
review rules, indicated its intent broadly to reexamine the form and
content requirements of Guideline No. 1, including consideration of
the possible applicability of an option-style checklist to
applications for designation of proposed futures contracts.6/ The Commission has noted that
"[i]mplementation of fast-track review and approval procedures,
separately and together with the planned revision of the format and
content requirements for designation applications, should result in
significantly streamlining the procedures and regulatory requirements
associated with the current contract designation process," 62 FR
10435, and that these initiatives should permit the exchanges greater
flexibility to compete with foreign exchange-traded products and with
both foreign and domestic over-the-counter transactions while
maintaining the basic protection embedded in the Act. 61 FR 59390
(November 22, 1996).

II. Proposed Revisions to Guideline

A. Proposed Changes to the Guideline's
Format

Based upon its experience in administering the
current guideline and the new fast-track procedures, the Commission is
proposing to revise Guideline No. 1 in several important respects.
First, the Commission is proposing to streamline Guideline No. 1 by
further reducing the required paperwork and by further clarifying the
information required to be included. In this regard, as discussed
above, the Commission has observed the success of the checklist
application for option contracts implemented in 1992 and believes that
a similar, but modified, framework using a chart rather than a
checklist can be used for applications for designation of futures
contracts.

Specifically, the Commission is proposing to
reorganize the contents of the current guideline to address
applications for four different types of contracts: 1) physical
delivery futures; 2) cash-settled futures; 3) options on futures; and
4) options on physicals. Except for options on physicals, the
requirements for each separate application are self-contained and
include the information relevant to demonstrating compliance with the
designation standards for that type of contract. The information
required is largely the same as under the current guideline, but is
presented in a clearer, more focussed format which includes the use of
charts. Information for option contracts will continue to be provided
by checklist. Moreover, the Commission is proposing to clarify certain
standards for review which have evolved based upon administrative
experience and to clarify that exchanges may fulfill the required
cash-market description with information developed by third parties.
The Commission intends to make this format available to the exchanges
electronically and to encourage exchanges to file electronically to
reduce further the paperwork burden associated with the application
process. These proposed revisions are discussed in greater detail
below.

1. Cash market overview

Currently, exchanges are required to include a
cash market description in their designation applications. 17 CFR Part
5, Appendix A(a)(1). The Commission is not proposing to amend this
requirement -- each application (except for options on futures) would
still require the inclusion of such an overview. However, the
Commission is proposing to amend Guideline No. 1 to recognize
explicitly the acceptability of a variety of materials in fulfillment
of this requirement. Under current practices, exchanges typically
produce their own specific cash-market descriptions. The Commission
notes, however, that the exchanges presently are not precluded from
doing otherwise and that exchanges have on occasion submitted cash
market descriptions which included third-party materials.7/

To reduce the burden on the exchanges in
satisfying the guideline's cash-market overview standards, the
Commission is proposing to clarify that exchanges need not submit
staff-prepared documents and that they may submit cash-market
descriptions based not only on materials generated by their staffs,
but also on materials obtained from other sources. Such materials may
be developed for an exchange by outside sources during a feasibility
study of a proposed contract, as part of the exchange's
development and consideration of a proposal or as part of its new
product marketing effort. In this regard, as proposed to be revised,
Guideline No. 1 explicitly would state that a cash-market description
may include:

Existing studies by industry trade groups,
academics, governmental bodies or other entities; reports of
consultants; or other materials which provide a description of
the underlying cash market. These materials may be submitted in
addition to, or in lieu of, information developed by the board
of trade.

2. Charts relating to individual contract
terms and conditions

The current guideline requires exchanges to
explain how each major term of a proposed contract, except for those
identical to terms already approved by the Commission, is consistent
with cash market practices or to justify the reason why the contract
term appropriately is inconsistent with such practices. Exchanges
submit this explanation or justification in narrative form. To further
streamline the application process, the Commission is proposing that,
in lieu of such a narrative description, an exchange may complete a
chart to provide the required information. The proposed chart format
will reduce the amount of verbiage and the overall length of
designation applications.

The proposed chart is a template enumerating the
significant contract terms and conditions typically contained in most
contracts. In view of the diverse nature of commodities for which
futures contracts may be developed, however, the template may be
modified as necessary to reflect the nature of the particular
commodity or the contract's specific terms and conditions. Also,
to the extent that a proposed contract includes additional terms and
conditions defining the economic characteristics of the underlying
commodity, the board of trade may modify the form as appropriate. For
example, if a contract provides for more than one quality
specification under commodity characteristics (e.g., a grade
standard as well as a weight specification), the board of trade may
add a separate line item to address each commodity characteristic
separately. For line items in the chart that are not applicable to the
proposed contract, the board of trade should simply indicate
"N.A."

The proposed chart would require that an exchange
include a brief description of the contract's major terms and
conditions. Where the term is consistent with prevailing cash market
practices, column 4 may be completed by providing a very brief
statement as to how the term or condition comports with cash
practices. However, where the term or condition does not comport with
cash market practices, a more extensive discussion is required showing
why the provision is necessary or appropriate for the hedging or
pricing utility of the contract and the overall effect of the
provision on deliverable supplies. Consistent with current
requirements, no such justification of an individual term or condition
would be required when that term or condition is the same as one
already approved by the Commission. For such contract terms, the board
of trade should reference in column 2 of the chart the rule number or
other description of the original approved provision.

In keeping with current requirements, the
application also requires an exchange to specify and to justify
speculative position limits as required under the criteria of
Commission rule 1.61, 17 CFR 1.61. The Commission is proposing that
this requirement also be fulfilled by completion of a chart. However,
the Commission is reviewing generally its speculative position limit
policies and may propose further revisions to this section of
Guideline No. 1 if it becomes appropriate in light of subsequent
revisions to its speculative position limit policies.

3. Clarification of review
standards

Central to an application for designation is an
exchange's demonstration that the proposed contract will not be
susceptible to price manipulation or distortion. For physical delivery
contracts, this requires a demonstration that the deliverable supplies
provided under the contract's terms are adequate, and for
cash-settled contracts, this requires that the cash price series to be
used for settlement is reliable. In light of the importance of these
issues to a designation application, the Commission is proposing
clarification of these requirements in the guideline.

i. Adequacy of deliverable
supply

Exchanges are required to demonstrate that
proposed contracts provide for deliverable supplies that will not be
conducive to price manipulation or distortion. A requirement that an
exchange include in its designation application an analysis of the
adequacy of deliverable supply including an estimate of the
deliverable supplies for the delivery months specified in the proposed
contract is implicit under the current guideline. The Commission is
proposing to clarify this requirement by requiring explicitly that
designation applications include an estimate of deliverable supplies
for the specified delivery months of a proposed contract.

Specifically, the Commission is proposing that
applications for designation of physical delivery futures contracts
include within a separate chart a quantitative estimate of expected
deliverable supplies and a description of the methodology used to
derive the estimate. For commodities with seasonal supply or demand
characteristics, the deliverable supply analysis should be based on
the delivery month(s) when potential supplies typically are at their
lowest levels. The estimate should be based on statistical data when
reasonably available covering an historical period that is
representative of actual patterns of production and consumption of the
commodity. If data are taken from publicly available sources, the
board of trade should reference the source material used. If the
estimates are derived independently by the board of trade based on
information not readily verifiable or on trade interviews, the
Commission may request that the board of trade provide the workpapers
or other source materials used in the analysis.

This estimate would be required to be made taking
into consideration the terms and conditions specified for the
deliverable product and the economic realities of the cash market
underlying the futures contract.8/ For a physical-delivery futures
contract, therefore, this estimate represents product which is in
store at the delivery point(s) specified in the futures contract or
economically can be moved into or through such points within a short
period of time after a request for delivery and which is available for
sale on a spot basis within the marketing channels that normally are
tributary to the delivery point(s).

For financial instrument contracts, deliverable
supply consists of available supplies of the instrument meeting the
contract's delivery standards that are available, at prevailing
cash market values, to traders wishing to make future delivery. For
example, significant quantities of off-the-run notes and bonds
typically may be held by the Federal Reserve System and long-term
investment portfolios (e.g., pension funds) and would not be
readily available for delivery on proposed futures contracts on U.S.
government debt instruments except at distorted prices. Recognizing
this and based on the opinions of knowledgeable industry participants,
Commission staff historically has used a rule-of-thumb that only 50
percent of the on-the-run U.S. Treasury bond and 10 percent of each of
the next two off-the-run bonds are economically available for
delivery.

The spot-month speculative position limits should
be set in relation to this deliverable supply estimate. Such
spot-month speculative position limits should be no greater than
one-quarter of the deliverable supply estimate for that
month.9/

ii. Justification of cash settlement
price

The adequacy of the procedures for determining
the cash settlement price is central to the Commission's review of
proposed cash-settled contracts. Applications for such proposed
futures contracts would continue to be required to demonstrate that
those procedures will result in a cash settlement price which reflects
the underlying cash market and is not subject to manipulation or
distortion. In order to provide additional guidance to exchanges in
meeting this requirement, the Commission is clarifying two of the
criteria which it has identified through past experience for meeting
these requirements. In this regard, any cash settlement price which is
determined by an exchange through a survey method to elicit price
quotes should include a number of polled entities which is
representative of the underlying cash market. In no event, however,
may the polling sample include fewer than four unrelated entities that
do not take positions for their own account in the futures, option or
underlying cash markets. Where the entities to be polled may trade in
such markets for their own accounts, a minimum of eight unrelated
entities would be required. These rule-of-thumb criteria have been
included in the relevant chart.

B. Effect on Pending
Applications

The proposed revisions to Guideline No. 1
streamline the application process for designation of contract markets
and clarify existing requirements and Commission practice. Because the
Commission is not proposing any new substantive requirements, however,
the Commission is permitting exchanges immediately to begin filing
applications consistent with the proposed format. Moreover, because
the Commission is permitting exchanges to continue providing the
required information in a narrative format if they prefer, no
application filed or already under development and nearing completion
which complies with the existing guideline would have to be
revised.

C. Foreign Futures Markets

The offer or sale in the United States of futures
contracts traded on or subject to the rules of a foreign exchange is
subject to the Commission's exclusive jurisdiction.10/

Although Section 2(a)(1)(B)(ii) of the Act
provides that the Commission shall not designate a board of trade as a
contract market in a futures on a securities index unless the
Commission finds that the board of trade meets three enumerated
criteria,11/ Congress
understood that a foreign exchange might lawfully offer futures
contracts on stock indexes absent designation. Thus, the House
Committee on Agriculture suggested that a foreign board of trade could
apply for "certification" that its stock index contract
meets all applicable Commission requirements. H.R. Rep. No. 565, Part
1, 97th Cong., 2d Sess. 85 (1982). That Committee further explained
that a foreign exchange seeking to offer in the United States a
futures contract based upon an index of United States securities must
demonstrate that the proposed futures contract meets the requirements
set forth in Section 2(a)(1)(B)(ii). Id. With regard to a
foreign stock index contract based on "foreign securities,"
the House Committee suggested that the Commission use such criteria as
it deems appropriate.

The Commission has not promulgated procedures for
the filing of requests by foreign boards of trade for
"certification" to offer or to sell such contracts, but
instead has issued through its Office of the General Counsel, several
"no-action" letters12/ regarding foreign stock index
contracts based on foreign securities using the criteria set forth in
Section 2(a)(1)(B)(ii) of the Act. As of June 4, 1998, such action has
been taken for 24 stock index contracts for offer or sale in the
United States that were submitted by 15 foreign boards of
trade.13/

Generally, the staff has analyzed such requests
for a "no-action" opinion under the requirements of Section
2(a)(1)(B)(ii) of the Act. Accordingly, the staff has requested that
the foreign board of trade file information which they deem relevant
to those criteria. 57 FR 3518. To facilitate the staff's review of
such requests by foreign boards of trade, the Commission is proposing
that a separate appendix be added to Part 5 that would enumerate the
information that foreign boards of trade should file with the
Commission to assist in the staff's analysis of such requests.
This information is the same as that previously requested to be filed.
Id. Some of the data which should be included are: the terms
and conditions of the contract and all other relevant rules of the
exchange; information on information sharing arrangements or any legal
obstacles to such sharing of information; and specific information
related to the composition and computation of the index. All
information should be submitted in English, including any supplemental
material such as explanatory notes, appended tables or charts. It
should be noted that the Commission consults with the SEC regarding
these procedures. When such consultation occurs, additional
information may be requested by the SEC.

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act ("RFA"),
5 U.S.C 601 etseq., requires that agencies, in
promulgating rules, consider the impact of these rules on small
entities. The Commission has previously determined that contract
markets are not "small entities" for purposes of the RFA, 5
U.S.C. 601 etseq. 47 FR 18618 (April 30, 1982). These
amendments propose to establish alternative streamlined procedures for
Commission review and approval of applications by contract markets for
designations and of amendments to contract terms and conditions.
Accordingly, the Chairperson, on behalf of the Commission, hereby
certifies, pursuant to 5 U.S.C. 605(b), that the action taken herein
will not have a significant economic impact on a substantial number of
small entities. However, the Commission invites comments from any
firms or other persons which believe that the promulgation of these
rules might have a significant impact upon their activi-ties.

B. Paperwork Reduction Act

When publishing proposed rules, the Paperwork
Reduction Act ("PRA") of 1995 {Pub. L. 104-13 (May 1, 1995)}
imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of information as defined by the PRA. In compliance with
the Act, the Commission, through this rule proposal, solicits comments
to:

(1) evaluate whether the proposed
collection of information is necessary for the proper
performance of the functions of the agency, including the
validity of the methodology and assumptions used; (2) evaluate
the accuracy of the agency's estimate of the burden of the
proposed collection of information including the validity of the
methodology and assumptions used; (3) enhance the quality,
utility, and clarity of the information to be collected; and
minimize the burden of the collection of the information on
those who are to respond, including through the use of
appropriate automated, electronic, mechanical, or other
technological collection techniques or other forms of
information technology, e.g., permitting electronic submission
of responses.

The Commission has submitted this proposed
rule and its associated information collection requirements to the
Office of Management and Budget. The burden associated with this
entire collection (3038-0022), including this proposed rule, is as
follows:

Average burden hours per response
3,609

Number of Respondents 15,693

Frequency of response On Occasion

The burden associated with this specific proposed
rule is as

follows:

Average burden hours per response 58

Number of Respondents 11

Frequency of response On occasion

Persons wishing to comment on the information
which would be required by this proposed rule should contact the Desk
Officer, CFTC, Office of Management and Budget, Room 10202, NEOB,
Washington, DC 20503, (202) 395-7340. Copies of the information
collection submission to OMB are available from the CFTC Clearance
Officer, 1155 21st Street, NW, Washington, DC 20581, (202)
418-5160.

In consideration of the foregoing, and pursuant
to the authority contained in the Commodity Exchange Act, and in
particular sections 4c, 5, 5a, 6 and 8a, 7 U.S.C. 6c, 7, 7a, 8, and
12a, the Commission hereby proposes to amend Chapter I of Title 17 of
the Code of Federal Regulations by revising Part 5 as follows:

PART 5 DESIGNATION OF AND CONTINUING
COMPLIANCE BY CONTRACT MARKETS

1. The authority citation for Part 5 continues to
read as follows:

Authority: 7 U.S.C. 6c, 7, 7a, 8 and
12a.

2. In Part 5, Appendix A is proposed to be
amended by revising it to read as follows:

APPENDIX A to Part 5--Guideline No. 1;
Interpretative Statement

regarding economic and public interest
requirements for contract market designation

(1) The rules setting
forth the terms and conditions of the proposed futures
contract.

(2) A description of
the cash market for the commodity on which the contract is
based.

(i) The description
may include, in addition to or in lieu of materials prepared by the
board of trade, existing studies by industry trade groups,
academics, governmental bodies or other entities, reports of
consultants, or other materials which provide a description of the
underlying cash market.

(ii) Where the same,
or a closely related commodity, is already designated as a contract
market which is not dormant, the cash market description can be
confined to those aspects relevant to particular term(s) or
conditions(s) which differ from such existing contract.

(3) A demonstration
that the terms and conditions, as a whole, will result in a
deliverable supply such that the contract will not be conducive to
price manipulation or distortion and that the deliverable supply
reasonably can be expected to be available to short traders and
salable by long traders at its market value in normal cash
marketing channels.

For purposes of this
demonstration, provide the following information in chart or narrative
form.

CONTRACT TERMS AND
CONDITIONS

TERM OR
CONDITION

EXCHANGE
PROPOSAL

RULE
NUMBER OF IDENTICAL APPROVED PROVISION, IF ANY*

EXPLANATION AS TO CONSISTENCY WITH, OR REASON FOR VARIANCE
FROM, CASH MARKET PRACTICE

(4) As specifically
requested, such additional evidence, information or data relating
to whether the contract meets, initially or on a continuing basis,
any of the specific requirements of the Act, including the public
interest standard contained in Section 5(7) of the Act, and whether
the contract reasonably can be expected to be, or has been, used
for hedging and/or price basing on more than an occasional basis,
or any other requirement for designation under the Act or
Commission rules and policies.

(b) APPLICATION FOR
CASH SETTLED FUTURES CONTRACTS

A board of trade shall
submit:

(1) The rules setting
forth the terms and conditions of the proposed futures
contract.

(2) A description of
the cash market for the commodity on which the contract is
based.

(i) The description
may include, in addition to or in lieu of materials prepared by the
board of trade, existing studies by industry trade groups,
academics, governmental bodies or other entities, reports of
consultants, or other materials which provide a description of the
underlying cash market.

(ii) Where the same,
or a closely related commodity, is already designated as a contract
market which is not dormant, the cash market description can be
confined to those aspects relevant to particular term(s) or
conditions(s) which differ from such existing contract.

(2) A demonstration
that cash settlement of the contract is at a price reflecting the
underlying cash market, will not be subject to manipulation or
distortion, and is based on a cash price series that is reliable,
acceptable, publicly available and timely.

For purposes of this
demonstration, provide the following information in chart or narrative
form.

CONTRACT
TERMS

TERM OR
CONDITION

PROPOSAL

RULE NUMBER
OF IDENTICAL APPROVED PROVISION, IF ANY*

EXPLANATION AS TO CONSISTENCY WITH, OR REASON FOR VARIANCE
FROM, CASH MARKET PRACTICE

*If an
identical provision has been approved for a nondormant contract in the
same commodity, there is no need to provide an explanation in the next
column.

CASH SETTLEMENT PRICE
SERIES

REQUIREMENT

RULE
NUMBER OF IDENTICAL APPROVED PROVISION

EXPLANATION OR JUSTIFICATION

1. Where an
independent third party calculates the cash settlement price
series, evidence that the third party does not object to its
use and provides safeguards against its susceptibility to
manipulation.

2. Where board
of trade generates cash settlement price series,
specification of calculation procedure and safeguards in cash
settlement process to protect against susceptibility to
manipulation (e.g., if self-generated survey, polling
sample representative of cash market, but with a minimum of 4
nontrading entities or 8 entities that trade for own
account).

3. Procedure
for, and timeliness of, dissemination to public.

4. Evidence that
price is reliable indicator of cash market values and is
acceptable for hedging.

SPECULATIVE
LIMITS

SPECULATIVE
LIMIT

STANDARD

LEVEL
(EXCHANGE RULE)

1. Spot
month.

Needed to
minimize potential for manipulation if underlying cash market
is small or trading is not highly liquid.

(4) As specifically
requested, such additional evidence, information or data relating
to whether the contract meets, initially or on a continuing basis,
any of the specific requirements of the Act, including the public
interest standard contained in Section 5(7) of the Act, and whether
the contract reasonably can be expected to be, or has been, used
for hedging and/or price basing on more than an occasional basis,
or any other requirement for designation under the Act or
Commission rules and policies.

(c) APPLICATION FOR
OPTION CONTRACTS

A board of trade shall
submit:

(1) The rules setting
forth the terms and conditions of the proposed option contract.

(2)(i) For options on
futures contracts, the terms and conditions of the proposed or
existing underlying futures contract.

(2)(ii) For options on
physical commodities:

(A) A description of the
cash market for the commodity on which the contract is based.

(1) The
description may include, in addition to or in lieu of materials
prepared by the board of trade: existing studies by industry trade
groups, academics, governmental bodies or other entities;
promotional or marketing materials prepared by or for the board of
trade; reports of consultants; or other materials which provide a
description of the underlying cash market.

(2) Where the
same, or a closely related commodity, is already designated and is
not dormant, the cash market description can be confined to those
aspects relevant to particular term(s) or conditions(s) which
differ from such existing contract.

(B) Depending on the
method of settling the option, the relevant chart for either a
physical delivery or cash settled futures contract.

(3) The following
completed chart.

CRITERION

APPLICABLE
CFTC RULE

(17
CFR)

STANDARD

MET BY
EXCHANGE RULE NUMBER

JUSTIFICATION FOR NOT MEETING STANDARD, OR RULE NUMBER OF
IDENTICAL APPROVED RULE

1. (i)

Speculative
limits.

150.5.

Combined net
position in futures and options on a futures-equivalent basis
at the futures position levels, with inter-month spread
exemptions that are consistent with those of the futures
contracts.

2. Aggregation
rule.

150.4.

Same as Rule
150.5(g) or previously approved language.

3. Reporting
level.

15.00(b)(2).

50 contracts or
fewer.

4. Strike prices
(number listed & increments).

33.4(b)(1).

Procedures for
listing strikes are specified and automatic.

5. Option
expiration & last trading day.

33.4(d)(1).

Except for
options on cash-settled futures contracts, expiration is not
less than one business day before the earlier of the last
trading day or the first notice day of the underlying
future.

6. Minimum
tick.

33.4(d).

Equal to, or
less than, the underlying futures tick.

7. Daily price
limit, if specified.

33.4(d).

Equal to, or
greater than, the underlying futures price limit.

(4) As specifically
requested, such additional evidence, information or data relating to
whether the contract meets, initially or on a continuing basis, any of
the specific requirements of the Act, including the public interest
standard contained in Section 5(7) of the Act or any other requirement
for designation under the Act or Commission rules and policies.

3. Part 5 is proposed to be amended by adding
new Appendix E to read as follows:

APPENDIX E--INFORMATION THAT A FOREIGN BOARD
OF TRADE SHOULD SUBMIT WHEN SEEKING NO-ACTION RELIEF TO OFFER AND SELL
IN THE UNITED STATES A FUTURES CONTRACT ON A FOREIGN SECURITIES INDEX
TRADED ON THAT EXCHANGE

A foreign board of trade seeking no-action relief
to offer and to sell in the United States a futures contract on a
foreign securities index traded on that exchange should submit the
following information in English:

(1) The terms and conditions of the contract and
all other relevant rules of the exchange and, if applicable, of the
exchange on which the underlying securities are traded, which have an
effect on the overall trading of the contract, including circuit
breakers, price limits, position limits or other controls on
trading;

(2) Surveillance agreements between the foreign
boards of trade and the exchange(s) on which the underlying securities
are traded;

(3) Information sharing agreements between the
host regulator and the Commission or assurances of ability and
willingness to share and assurances from the foreign exchange of its
ability and willingness to share information with the
Commission.

(4) When applicable, information regarding
foreign blocking statutes and their impact on the ability of United
States government agencies to obtain information concerning the
trading of such contracts; and

(5) Information and data, denoted in U.S.
dollars, relating to:

(i) The method of computation, availability, and
timeliness of the index;

(ii) The total capitalization, number of stocks
(including the number of unaffiliated issuers if different from the
number of stocks), and weighting of the stocks by capitalization and
if applicable by price, in the index;

(iii) Breakdown of the index by industry segment
including the capitalization and weight of each industry
segment;

(iv) Procedures and criteria for selection of
individual securities for inclusion in, or removal from, the index,
how often the index is regularly reviewed, and any procedures for
changes in the index between regularly scheduled reviews;

(v) Method of calculation of the cash-settlement
price and the timing of its public release; and

(vi) Average daily volume of trading by calendar
month, measured by share turnover and dollar value, in each of the
underlying securities for a six-month period of time and, separately,
the daily volume in each underlying security for six expirations
(cash-settlement dates) or for the six days of that period on which
cash-settlement would have occurred had each month of the period been
an expiration month.

Issued in Washington, D.C. this __ day of
___________, 1998 by the Commodity Futures Trading Commission.

____________________________

Jean Webb

Secretary of the Commission

1
/ Designation as a contract market under the 1921 Act was
contingent upon a board of trade's providing for the prevention of
manipulative activity and the prevention of dissemination of false
information, upon providing for certain types of recordkeeping and for
admission into exchange membership of cooperative producer
associations, and upon location of the contract market at a terminal
cash market. See, §§5(a), (b), (c), (d) and (e) of
the Futures Trading Act of 1921. Although the constitutionality of
this Act was successfully challenged as an improper use of the
Congressional taxing power in Hill v.Wallace, 259 U.S.
44 (1922), all subsequent legislation regulating the futures industry
was patterned after this statutory scheme.

2
/ The Act further requires, as a condition for contract market
designation that the contract market, interalia: be
located at a terminal cash market or provide for terms and conditions
as approved by the Commission (Section 5(1) of the Act); provide for
various forms of recordkeeping (Sections 5(2) and 5a(a)(2) of the
Act); permit the membership of cooperative associations (Section 5(5)
of the Act); provide for compliance with Commission orders (Section
5(6) of the Act); submit its rules to the Commission (Sections
5a(a)(1) and 5a(a)(12) of the Act); provide that the terms of the
contracts conform to United States commodity standards or those
adopted by the Commission (Section 5a(a)(6) of the Act); accept
warehouse receipts issued under United States law (Section 5a(a)(3) of
the Act); and enforce exchange rules (Section 5a(a)(8) of the
Act).

3
/ Generally, the burden of demonstrating compliance rests with
the contract market. Section 6 of the Act provides, in part,
that:

Any board of trade desiring to be designated a
"contract market" shall make application to the
Commission for such designation and accompany the same with a
showing that it complies with the above conditions, and with a
sufficient assurance that it will continue to comply with the above
requirements.

4
/ In conjunction with these revisions to the application for
contract market designation, the Commission also modified many of its
internal procedures to expedite the review and approval of new
contracts and proposed amendments to existing contracts. These
include, for example, a policy to notify the public of the
availability of proposed contract terms for comment by publication in
the FederalRegister within one week of receipt of an
application. In addition, under these procedures, substantive issues
are identified and communicated informally to the exchange very
shortly after receipt, permitting a prompt resolution. The review and
approval of new contracts usually is completed shortly after the
FederalRegister public comment period ends or as soon as
the exchange makes the modifications necessary to address a proposed
contract's deficiencies. With these changes, the total review time
for new contracts declined significantly.

5
/ An additional 10 contracts were approved under non-fast-track
review procedures. These included five equity index contracts, which
were not eligible for fast-track approval because of the statutory
requirement of review by the U.S. Securities and Exchange Commission
(SEC), one contract that was approved under regular procedures before
the end of the fast-track period, and four contracts that were
processed under regular procedures at the request of the submitting
exchange.

6
/ Guideline No. 1 applies only to the economic requirements that
must be met in order to be designated as a contract market. Additional
requirements are found in the Commission's Guideline No. 2, 1
Comm. Fut. L. Rep (CCH) ¶ 6430. These relate to the contract
market's program for compliance with its self-regulatory
responsibilities. Generally, the review of these issues is most
significant in connection with the first application for contract
designation from a particular board of trade.

7
/ For example, some exchanges have submitted background studies
on proposed contracts that were prepared by outside
consultants.

8
/ Obviously, only product meeting the specified quality
standards (e.g., the grade, age, purity, weight, etc. for
tangible commodities or the issue, maturity, rating, etc. for
financial instruments) is eligible for delivery on a futures contract
and should be considered as part of the deliverable supply.

9
/ The Commission believes that spot-month speculative position
limits are not an ideal substitute for deliverable supplies. In this
respect, the fact that an exchange may specify a spot-month
speculative position limit that equals or is less than the
"rule-of-thumb" standard of one-fourth of a low deliverable
supply estimate does not mean that deliverable supplies are at
adequate levels. The Commission has approved new futures contracts or
amended existing futures contracts with low deliverable supplies only
after an exchange has exhausted potential sources of deliverable
supplies and, if necessary, adopted low spot-month speculative limits
to give it the ability to limit potential delivery demand. The
preferred approach under the Act if deliverable supplies are
inadequate is for the exchange to modify the delivery specifications
to enhance deliverable supplies. See, section 5a(a)(10) of the
Act.

11 / These three criteria are contained in Section
2(a)(1)(B)(ii). They are:

(1) The contract must provide for cash
settlement;

(2) The proposed contract will not be readily
susceptible to manipulation or to being used to manipulate any
underlying security; and

(3) The index is predominately composed of the
securities of unaffiliated issuers and reflects the market for all
publicly traded securities or a substantial segment thereof.

12 / A no-action letter is a written statement that staff of a
specific division will not recommend enforcement action to the
Commission if a proposed transaction is undertaken or a proposed
activity is conducted. A no-action letter represents the position of
only the division issuing it and is binding upon that division and not
on the Commission or other divisions. Further, a no-action letter is
only effective with respect to the person or persons to whom it was
issued and has no precedential effect.